Seventh in a Series of Articles on the Eight Essential Elements of Special Finance
When it comes to discussing the seventh of the Eight Essential Elements of Special Finance in my monthly seminars, I generally save the issue of compliance until well after lunch. It is generally the one element that few people come to learn more about, and quite honestly, if offered immediately prior to lunch, can cause quite a bit of food to be left on the lunch buffet table.
It is also a topic that I always feel can be better covered on other pages of this magazine by my friend Mr. Tom Hudson. Over the years, he has taught me the majority of what I have learned in ‘Special Finance Business Law” and graduate classes (some graciously offered while traveling cross country seated next to him on an airplane).
Compliance is not a subject that anyone really wants to hear or read about … until they need it – which is generally too late. But it is one that absolutely must be studied and adhered to when building a successful Special Finance department.
Here I offer some areas of compliance where I may have some unique perspectives not offered by Tom.
As you can guess by the many articles penned on compliance, there are more ways to get into trouble without even trying than you can imagine.
As you glance over the foregoing issues, understand that many of those we talk and read about are not simply civil in nature, they are indeed criminal acts (as if civil issues weren’t bad enough!).
You see, much of what takes place in a SF deal does so either through the mail (mail fraud) or with a bank (bank fraud). Yes, many of the lending institutions to which you assign retail installment sales contracts are indeed owned by banks.
In my seminars, I always preface the training with four true stories; all are friends or acquaintances of mine (all with names and locales omitted), each one having paid an expensive price tag for their transgressions - prison time.
One of the most compelling stories was of Gerald Wainright (not his real name) an absentee owner who thought he had all the necessary policies and procedures put in place along with an edict to do things above board. It took only one rogue General Manager to take him down.
The GM’s actions (fraud), which he had been heavily sanctioned for in another city (unbeknownst to Wainright) prior to starting at this dealership, caused the dealer to pay $250,000 and be sentenced to five years in Federal prison. That’s where you serve 80+ percent of your sentenced time. This dealer had a 13 year old and an 8 year old when he went to jail.
I venture to say there are very few dealers that if asked how much they would have to earn to be willing to spend four-plus years in prison would be willing to put a price tag on it – period.
I am equally confident that few SF Managers and Business Managers would be willing to do so either. Yet every day, in more dealerships that I can count, situations take place that could cause that to happen. This stuff is real.
Now that I have your attention, realize that the automobile business is one of the most regulated industries within the United States.
Over the course of time a few unscrupulous dealers have connived, cheated, twisted and otherwise taken advantage of customers to the extent that someone decided, in the interest of fairness, that all dealers must abide by some new regulation (whether well thought out or not).
Oh by the way – it is your responsibility to find out what applies to your transactions, and ignorance of the law is not a defense.
Now I am not writing to the few unscrupulous dealers here – they aren’t the ones reading this magazine – at least this article. They already know what rules they are bending and breaking, and are willing to tempt fate.
I am writing to the masses, the ones that truly don’t know better, or maybe the ones that don’t realize they have been led astray.
That leads me to the place where I may have a perspective unique from my highly respected friend, Mr. Hudson.
Having been a dealer for eighteen years, nearly 13 of which I owned stores that were highly focused on Special Finance; I have had more than a few occasions to rub elbows with the upper echelon of the lending community.
Lenders can be one of the biggest sources of misinformation and wrongdoing that you can find.
At the risk of offending my many friends comprised of CEOs, presidents, executive vice-presidents in the lending community, it is the truth. And it is unfortunately often where compliance begins to head down the wrong path. How can that be?
Let’s start with one simple concept – the down payment. It is the one item that probably causes more issues between customers, dealers and finance companies than any other issue.
Minimum down payments make or break car deals. A dealer can often be sitting on a $5000 gross profit, and without the lender’s minimum required down payment being available, there is no car deal.
Similarly, a dealer can put together a skinny deal on the only vehicle they can get the customer to accept. Along the way they discover that if they are patient enough to hold a couple of $500 checks for a few weeks, they can add an additional $1000 gross to a deal.
Somewhere, someone within the organization is tempted by the apple being offered by Eve.
That is where it gets sticky. All banks and finance companies have what is called Dealer Agreements (or something similarly titled). It is the contract under which the companies will allow you to assign the retail installment sales contracts to them, in exchange for money. In simple terms, it is the promises each side makes in order to get the dealer’s paper turned into cash.
To the managers reading this, if you haven’t read the agreements that your dealer has signed with your lenders, you should ask to read them. They make good insomnia fighters.
These dealer agreements are what count. They are the promises, period. The lenders may occasionally (or routinely) look the other way when you break your promises, just as we may choose to do so with our young children (because we love them), but ultimately, the agreement is what counts.
OK, so what am I talking about when I refer to lender “misinformation”?
The field representatives that have day-to-day contact with the department managers can be excellent sources of information. They can also be the Achilles Heel of both sides.
The examples that I offer are situations that I have personally observed, either in my own stores or as I travel around the country training dealers. Not to indict specific lenders (and not naming names) all of these situations occurred with different companies, and each one of them was a “big name” player in the industry.
Consider a SF manager, sitting in their office. The representative comes calling, offering smiles, important information on new programs and maybe even a golf shirt and a pizza.
This person can truly help continue the education of the manager, explaining where the “sweet-spot” of the lender lies (regardless of what their programs state), how the dealer’s portfolio is performing, how to better improve look-to-book, or even key components that the lender looks for in buying deals.
Or the representative can come in offering information on how to get around the lender’s minimum required down payment guidelines and do deals where the customer has no money down, and/or is considerably upside down in their trade.
I know I have witnessed this at least five times, by five different lenders, in five different spots in the country.
I ask you, if you were the Special Finance Manager, would you ask any questions? The representative of the lender (who is likely paid on contract volume) showed you how to do it. That must mean it is OK.
Additionally, most SF Managers have never read the Dealer Agreement; therefore they have no reason to believe they are being told anything wrong. (In fact many dealers have never read the Dealer Agreement either.)
It gets better. Again, I have witnessed this more times than I can count, and all over the country.
Consider this. Two lender reps, from two different prominent companies, were reviewing 30 – 35 fresh deals, just contracted over a busy weekend. To assist the dealer, they were helping enter them into Dealer Track.
These reps were going through the raw deal jackets. There were assorted maladies in these jackets. The primary SF manager had not been involved that weekend, and there were held checks, promissory notes, and credit apps stating $4000 monthly income with accompanying pay stubs verifying $7 an hour in the jackets.
The lender reps resembled sharks on chum, a true feeding frenzy. They were waiving income requirements, ignoring all of the other niceties, and negotiating with each other as to who would get what. I am sure this wasn’t the first time the two had done this drill.
Again, what exactly does this show the dealer and the department? That it is standard practice, of course. Why should they question it? There was $100,000+ gross profit in those deals.
It gets better. This time from higher up. At a training meeting that I was conducting, the President, a Senior Vice President and Senior Credit Analyst from yet another prominent company made a presentation.
The Senior VP began to make a statement concerning down payments. I figured I knew where this was going to go. Wrong. I was expecting the boilerplate out of the Warranties and Representations paragraph of their Dealer Agreement. What came out was the statement that “We all know that everyone does pickup-payments and held checks, and that it is no big deal, but we just don’t like to see them too large or strung out longer than when the first payment is due.”
Knock me over with a feather.
One dealer asked, before I could start breathing again, what about the nasty section in their Dealer Agreement that expressly prohibited those actions.
“Look, we all know what goes on, it is no big deal,” was the answer.
Ultimately, it isn’t a big deal. As long as your portfolio continues to collect at or above the company’s average. As long as the company continues to collect well. As long as you keep giving them contracts. As long as you maintain a good relationship with the lender. As long as the same people are employed with the same company.
There’s the catch.
Since 1989 I have seen countless companies fail, merge, or get bought out. When that happens, the retail installment sales contract is still out there, and wherever it is, it was bought or assumed under the terms of the same Dealer Agreement that you originally signed.
By then, the reps, and likely even the executives, are gone. The assuming company has no relationship with your dealership. Your contracts are simply part of a financial investment. The assuming company simply wants a return on their dollar. That’s when it can get sticky.
Again, this is not an indictment of all of the lending partners in the industry, or all of their personnel.
I choose not to believe that neither the dealers nor the finance companies wish to do things the wrong way. Often however, the upper level of management on both sides can be so insulated that they don’t realize what is going on. Or maybe they do, and accept it as a calculated business risk.
The problem is that a field rep is a credible source for SF Manager or Business Manager, who generally gets very little training from the dealer on the legal issues that impact their positions. One misguided rep can influence hundreds of departments, giving the employees the impression that the dealer doesn’t know what he is talking about.
Who knows what, if anything, will ever come out of some of these transgressions? Obviously, I hope nothing. However the potential is there. What you don’t know can get you into a mountain of trouble.
Just ask Gerald Wainright and his family.
Vol 2, Issue 7
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